Greenspan warns Congress on deficit

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Alan Greenspan, chairman of the Federal Reserve, has warned that
America's federal budget deficits were "unsustainable" and urged
Congress to scrutinise both spending and taxes to solve the
problem.

Dr Greenspan also warned that the deficits could be driven
sharply higher by costs connected to the ageing of the baby boom
generation, particularly entitlement programs like Social Security
and Medicare.

While reiterating his support for President George Bush's plan
to offer private accounts as part of overhauling Social Security,
Dr Greenspan urged lawmakers to tackle the program's problems now,
rather than later.

The assessment was Dr Greenspan's gloomiest to date about the US
Government's budget straits. Unless Congress took major action to
reduce the deficits, preferably, he said, by deep cuts in spending,
annual budgetary shortfalls would continue and closing those gaps
would become more difficult.

Though Dr Greenspan has made similar pleas in the past, he spoke
more urgently on Wednesday and disagreed more adamantly with
Republican lawmakers and Mr Bush, who have steadfastly refused to
put restrictions on new tax cuts.

"Addressing the Government's own imbalances will require
scrutiny of both spending and taxes," Dr Greenspan told members of
the House Budget Committee. "However, tax increases of sufficient
dimension to deal with our looming fiscal problems arguably pose
significant risks to economic growth and the revenue base."

The Fed chairman emphasised that his own preference was to
reduce deficits by cutting spending rather than raising taxes. But
he said the "overriding principle" was to reduce the deficit,
making compromise essential.

"It's the principle that I think is involved here, namely, that
you cannot continuously introduce legislation which tends to expand
the budget deficit," Dr Greenspan said.

The Fed chairman's tone was noticeably more urgent than it was
last year or even in Congressional hearings just a few weeks
ago.

"When you begin to do the arithmetic of what the rising debt
level implied by the deficits tells you, and you add interest costs
to that ever-rising debt, at ever-higher interest rates, the system
becomes fiscally destabilising," he told lawmakers. "Unless we do
something to ameliorate it in a very significant manner," he
warned, "we will be in a state of stagnation."

White House officials played down Dr Greenspan's remarks, noting
that he had placed top priority on reduced government spending and
that Mr Bush had vowed to reduce the budget deficit by half by
2009.

"The President does have a substantial deficit-reduction
package," said Trent Duffy, a White House spokesman. "His budget is
a continuation of that policy and he looks forward to working with
Congress in cutting that spending down. Likewise, the President
agrees that the long-term budget is the issue, which is why he's
trying to lead a national discussion and reform movement to save
and strengthen Social Security."

Dr Greenspan's comments deepened a long-running disagreement
between the Federal Reserve and the White House, and they come at a
time when House and Senate leaders are trying to hammer out a
budget resolution or blueprint for tax and spending bills this
year.

Dr Greenspan, a Republican, has long argued that Congress should
reinstate rules that would require lawmakers to offset tax cuts and
new spending programs with savings in other areas.

Mr Bush and his Republican allies in Congress have insisted that
any such "pay as you go" restrictions, which existed in the 1990s,
apply only to new spending and not to new tax cuts.

Reinstating the previous budget rules would make it far more
difficult, if not almost impossible, for Congress to extend
permanently Mr Bush's tax cuts.

Extending all of the expiring tax cuts adds about $US1800
billion ($2300 billion) to the federal debt over 10 years,
according to the Congressional Budget Office. That's on top of a
rapid escalation in the federal debt from $US3400 billion to
$US4300 billion since 2001.